Paint Your Own Patterned Rug on the Cheap

Welcome to Selfmade Finance School, our new money series with Block Advisors to help small business owners with their tax, bookkeeping, and payroll needs year-round. This week, we tackle financial literacy and the money terms you should know.

Financial jargon can be intimidating and personally I think it is one of the main reasons people feel overwhelmed when talking about money and taxes. I have found that if you can break down the jargon, it is really not that scary. Today I will do my best to take some heavy words and turn them into your new lingo!

But don't worry, you don't need to memorize – or even fully understand – everything outlined here. If you're working with a tax professional who specializes in small business taxes, they'll handle it for you. And should be able to explain anything that doesn't make sense.

"Small business taxes and tax jargon can be complicated, but you don't have to go it alone," said Marcie Rahn, EA and Certified Master Instructor at Block Advisors. "Our small business certified tax pros are up to date on all federal, state and local tax laws and have an average of 12 years' experience. Let us sweat the details so you can focus on what you're best at. For most people, that's not taxes, bookkeeping and payroll. Luckily, that's exactly what Block Advisors is best at."

Adjusted Gross Income: This sounds fancy but it's a fairly straightforward concept. Your Adjusted Gross Income (AGI) is the starting point for calculating your taxes and determining your eligibility for certain tax credits and deductions that you can use to help you lower your overall tax bill. Some common examples of deductions that reduce AGI include traditional IRA contributions, health savings account contributions and educator expenses. In many types of businesses, your net business income, which is simply your total gross income minus specific deductions, like inventory, employee pay and benefits, mileage for business vehicles, business-related travel expenses, business utilities, ongoing education, and more, passes through to you as a business owner and is included in your AGI. (Note: This is not a comprehensive list).

What Is Depreciation?

If you own a business, you can deduct purchases used to make income for your business over time. This includes business assets like equipment and property. To do this, you will need to determine the depreciation schedule for the asset. Depreciation means you're spreading and deducting the cost of the asset over several years. This gets rather nuanced and is based on the three/five/seven-year (or longer) property timeframe in which you can depreciate the assets. You may be able to immediately write-off (deduct) the cost of some kinds of assets in the year you purchase them. You can also depreciate real estate if used in a trade or business if it creates income for you. Understanding depreciation can get complex so I suggest using a tax professional for this.

What Are Capital Gains and Do I Need To Care?

A capital gain is the rise in value of a capital asset (for example a security or real estate) that gives it a higher worth than the purchase price. The price you pay for something is called your cost or cost basis. The difference in the price when you sold it versus the cost basis is considered your capital gain or capital loss. There are distinct tax consequences when dealing with capital gains and losses so it is always important to be aware of what your tax liability would look like before you sell an asset.

What Does It Mean To Be Audited?

There are several types of audits. A mail audit is limited to a few items on an audit letter that you will receive from the IRS. It is usually something that got flagged and they need clarity on it. It may be fairly simple to clear up if you have the right documentation and get help responding.

Most important – never ignore a letter from the IRS!

An office or field audit is more work. You will need to gather the information/documents that the IRS is requesting and prepare to answer in-depth questions about your business's finances and activities. You will also need to prepare to explain, in detail, the business's accounting and recordkeeping system (so as a business owner, make sure YOU understand this). If you don't already have one at this point, it is HIGHLY recommended that you hire a licensed tax professional to represent you and advocate your tax return positions. If you don't have someone in mind, reach out to Block Advisors — they are experts.

What is a Schedule C and does it apply to me? The Schedule C is basically your profit and loss rundown (P&L) from your business if you are a sole proprietorship. It is used to report income and expenses to the IRS and shows how much money you made or lost in a business that you operated by yourself. The form reports how much of your income from your business is subject to tax or whether you have a loss for tax purposes. You file a Schedule C along with your Form 1040. In many cases, you may also have to file a Schedule SE (Self-Employment Tax). Your Block Advisors small business certified tax pro can help you with this.

This is a short list of jargon in the tax space. There is plenty more behind this. Like I said, I highly suggest hiring someone to help you through your taxes, especially if you are feeling overwhelmed.